Top 3 Key Takeaways
- Sections 338(h)(10) and 336(e) can align buyer and seller tax goals.
Both elections allow a stock sale to be treated as an asset sale for tax purposes, giving buyers the benefit of a stepped-up asset basis while allowing sellers to complete a stock transaction—helping bridge otherwise competing tax objectives. - The right election depends on deal structure and the parties involved.
Section 338(h)(10) is more restrictive, requiring a corporate buyer and mutual agreement, while Section 336(e) offers greater flexibility in buyer type, transaction structure, and seller control. Choosing the wrong election can limit deal flexibility or increase tax exposure. - Tax elections directly impact deal value, risk, and negotiations.
These elections affect purchase price, indemnities, representations, and post-closing liabilities, as well as state and federal tax outcomes. Early coordination with experienced tax and legal advisors is essential to maximize value and avoid costly surprises.
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In previous blogs we have written about the importance of deal structure in mergers and acquisitions and the competing tax priorities that drive buyer and seller preferences. With asset sales providing greater tax benefits and liability protections for buyers, and asset sales providing a capital gains tax break and a cleaner exit for sellers, it can seem like there is no deal structure that will satisfy both sides. Two provisions in the Internal Revenue Code, Section 336(e) and Section 338(h)(10), bridge the gap by allowing stock sales to be treated as asset sales for tax purposes.
The key tax benefit provided to a buyer by an asset acquisition is the ability to step up the basis of those assets to their current fair market value. This provides better depreciation and tax deductions, which can have a significant effect on the overall value of the transaction over time. But while both provisions, on their surface, accomplish a similar goal, there are key differences to understand when determining which best aligns with your transaction objectives.
What Are the Differences Between Section 338(h)(10) and Section 336(e) Elections?
Among the key differences between these two elections are the buyer’s entity type, the seller’s entity type, the election type, and the transaction structure. These include:
| Aspects of the deal | Section 338(h)(10) | Section 336(e) |
| Buyer | Must be a corporation | Can be an individual, partnership, LLC, or other noncorporate entity |
| Seller | Must be a US corporate subsidiary of a parent company or an S corporation | Can be a domestic corporation, consolidated group, or S corporation shareholders |
| Control over election | Requires mutual agreement between buyer and seller | Seller can make the election independently |
| Transaction structure | Requires a single corporate buyer to acquire at least 80% of the target’s stock within a 12-month period | Allows for the aggregation of sales to multiple buyers over a 12-month period to meet the 80% threshold |
| Qualifying disposition | Must be a qualified stock purchase by the purchasing corporation | Can include any qualified stock disposition, including sales, exchanges, and distributions |
| Impact on liability | Transaction is still a stock sale for legal purposes; target’s liabilities may be transferred to the buyer | Transaction is still a stock sale for legal purposes; target’s liabilities may be transferred to the buyer |
| Tax consequences for seller | Seller is taxed on the deemed sale of assets; if an S corporation, gain flows through to shareholders | Seller is taxed on the deemed sale of assets; if an S corporation, gain flows through to shareholders |
The specific tax implications for buyer and seller, including potential tax consequences at the state level, will vary depending on the exact circumstances of the transaction, which is why it is imperative to work with experienced tax advisors from the outset. In addition, either of these elections will influence the course of negotiations over the acquisition agreement. For example, a buyer will want to pay particular attention to representations, warranties, and indemnification clauses, as they may inherit unknown liabilities with their purchase. A seller, on the other hand, may wish to negotiate a higher purchase price if the election will result in a greater tax liability. Both buyer and seller should also be aware of the specific tax filing requirements and the applicable deadlines associated with each type of election to ensure they remain in compliance.
Maximizing M&A Deal Value with Precision and Planning
While a Section 338(h)(10) or 336(e) election can be the foundation of a win-win deal structure for buyer and seller, it is not an automatic solution to the challenges of reconciling buyer and seller perspectives. As with any successful M&A deal structure, the details have a profound effect on the value each side realizes from the transaction, as well as the risk of future litigation.
At Bridge Law, we approach every domestic and international transaction with meticulous attention to planning, tax efficiency, and your long-term business objectives. If you are buying or selling a business, we can help you explore your options to achieve the maximum value for your deal. To schedule your consultation, contact us here today.
Frequently Asked Questions
A Section 338(h)(10) or 336(e) election allows the parties to achieve the economic and tax benefits of an asset acquisition while preserving the legal structure of a stock sale. This approach can reduce disruption to the target’s operations, maintain key contracts and licenses, and streamline the closing process—while still delivering meaningful tax advantages to the buyer.
No. Although the transaction is treated as an asset sale for tax purposes, it remains a stock sale from a legal standpoint. As a result, the buyer may assume existing or contingent liabilities of the target company. Careful drafting of representations, warranties, and indemnification provisions is essential to allocate risk appropriately and protect the buyer’s interests.
A Section 338(h)(10) election requires the mutual consent of both buyer and seller and must be reflected in the acquisition agreement. By contrast, a Section 336(e) election may be made unilaterally by the seller, which can provide additional flexibility depending on the structure of the transaction. Understanding who controls the election is critical, as it can significantly influence negotiations and overall deal economics.
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